Fed survey finds some easing of lending standards among domestic banks

By Angela McDaniels

Tacoma, Wash., May 6 - Nearly 20% of surveyed domestic banks reportedly eased terms on loans during the first quarter, and many cited increased competition for such loans as an important reason for having done so, according to the Federal Reserve Board's April Senior Loan Officer Opinion Survey on Bank Lending Practices.

The banks received the survey on April 2, and responses were due by April 16.

Overall, standards for commercial and industrial loans or credit lines - other than those used to finance mergers and acquisitions - for large and middle-market firms were basically unchanged, but respondents reported some changes in the terms of loans approved over the past three months.

Large and middle-market firms are defined as having annual sales of $50 million or more.

When asked about their standards for approving applications, 80.9% of respondents said they were basically unchanged and 19.1% said they eased somewhat.

On the topic of interest rates, 61.8% of respondents said the spreads of loan rates over their banks' cost of funds eased somewhat over the past three months, and 33.8% said they were basically unchanged.

For interest rate floors, 59.1% of respondents said their use eased somewhat and 10.6% said their use eased considerably.

Around a third of respondents reported that loan covenants (32.4% of respondents) and the costs of credit lines (33.8%) had eased somewhat.

Majorities of respondents reported that the following terms were basically unchanged: collateralization requirements (95.6% of respondents), the maximum size of credit lines (82.4%), the maximum maturity (83.8%) and premiums charged on riskier loans (75.0%).

Reasons

Among banks that eased their credit standards over the past three months, 56.0% cited more aggressive competition from other banks or nonbank lenders as a very important reason, and 42.0% cited this as a somewhat important reason. Two percent said it was not important.

Others reasons that were cited as somewhat important were a more favorable or less uncertain economic outlook (31.3% of respondents), increased tolerance for risk (17.0%) and increased liquidity in the secondary market for these loans (14.9%).

Most of the respondents said the following reasons were not important: reduced concerns about the effect of legislative changes, supervisory actions or changes in accounting standards (93.8% of respondents), improvement in their banks' current or expected capital position (91.%) and improvement in their banks' current or expected liquidity position (89.1%).

Demand

In the survey, 58.8% of respondents found demand for commercial and industrial loans from large and middle-market firms to be about the same, and 23.5% said it was moderately stronger.

As for why, 88.9% of respondents cited an increase in customer investment in plants or equipment as a somewhat important reason.

Other reasons cited as somewhat important were an increase in customer accounts receivable financing needs (77.8% of respondents) and an increase in customer inventory financing needs (72.2%). A little less than half (47.1%) cited an increases in customer merger or acquisition financing needs as somewhat important.

A small but notable percentage of respondents, 11.8%, cited as very important a shift in customer borrowings to their bank from other bank or nonbank sources because these other sources became less attractive.

A majority of the respondents, 58.2%, reported that the number of inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines remained about the same over the past three months, 23.9% reported a moderate increase and 17.9% reported a moderate decrease. The respondents were asked to exclude refinancing of existing loans and to disregard seasonal variation when answering this question.

Foreign lending

A set of special questions in the April survey asked respondents about lending to banks based in Europe and their affiliates and subsidiaries.

Forty-four respondents answered that their banks do not make loans to banks based in Europe.

Of the respondents who answered the special questions, 100% said their credit standards and terms for approving applications for loans or credit lines to Europe-based banks was basically unchanged over the past three months, and 95% said the demand for loans at their bank from Europe-based banks was about the same. Five percent said the demand was moderately stronger.

Respondents were asked to what extend their banks experienced an increase or decrease in business, with either foreign or domestic customers, as a result of increased or decreased competition from European banks. More than half (55.0%) said their banks do not compete with European banks for business, 41.4% reported a decrease in competition from European banks and 3.4% reported an increase.

The 41.4% of respondents who reported a decrease was broken down into 27.6% who said that decreased competition had not appreciably increased their banks' business and 13.8% who said it had increased their business to some extent.

The Fed received responses to its survey from 68 domestic banks and 21 U.S. branches and agencies of foreign banks. The responses above are from the domestic banks.

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